US Office Market Posts Record Negative Absorption in Q1

While overall office vacancy has continued to rise throughout the course of the pandemic—thanks in part to an oversupply of new sublease space—average full-service asking lease rates for the sector have remained resilient, with landlords holding firm on asking rates. 

Asking rents for downtown Class A office properties were $51.99 per square foot last quarter, a 1.4% change over Q4 2020 levels, according to a new report from Colliers on the state of the sector. Meanwhile, asking rents for suburban office product averaged $32.33 per square foot in Q1, a 1% change over the prior quarter.

“While leasing remains well below pre-pandemic levels, the spread between asking and effective rates is widening as landlords continue to offer generous concessions such as free rent and tenant improvement allowances in place of dropping their rates,” the report notes.

Overall sublease supply increased by a whopping 55% in 2020, and an additional 15 million square feet were added in the first quarter of this year. That means that for the first time ever, the total amount of sublease space available for lease exceeded 200 million square feet. However, the rate at which new sublease space is coming to market across the US appears to be slowing and has decelerated over the past two quarters.

Amazon deals accounted for two of the top five office leases in Q1: a 706,996 square foot location in Boston (the largest office lease in the quarter) and a 605,000 square foot location in Seattle’s Puget Sound region, which clocked in at No. 2. Blackstone Group nabbed the No.2 spot, with a 652,615 square foot lease at 345 Park Avenue in New York City, and Andurll and Beyond Meat inked deals in the greater Los Angeles area that accounted for the fourth and fifth top leases in Q1.

New York City led negative absorption for the first quarter, at negative 12.2 million square feet, followed by Los Angeles (-3.6 million), Dallas (-3.0 million ), Atlanta and Washington, D.C. (-2.8 million), San Francisco Bay Area (-2.7 million) and Seattle (-2.6 million). In sum, 12 metro office markets posted negative absorption exceeding 1 million square feet in Q1, and absorption losses appeared to be evenly distributed between downtown and suburban submarkets.

“The US economy is projected to expand by a heady 6.2% this year while consumer sentiment has reached a one-year high and retail sales grew by almost 10% in March,” the report notes. “However, recovery in the office market is set to lag. Record levels of sublease space and negative absorption, combined with pressure on rents and a subdued investment market, suggest that the sector could remain challenged through this year before signs of stabilization begin to emerge and we see a full return to the office.”